26/04/2012 - 11:05

Making sense of PPPs not easy

26/04/2012 - 11:05

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A Treasury report seeks to demonstrate that the private sector can deliver infrastructure more efficiently than the public sector but does not explain its case thoroughly.

A Treasury report seeks to demonstrate that the private sector can deliver infrastructure more efficiently than the public sector but does not explain its case thoroughly.

State governments in Western Australia historically have been very reticent in their use of public private partnerships (PPPs), relative to their interstate peers.

Governments in other states have contracted the private sector to build, own and operate all manner of infrastructure, from schools to hospitals and desalination plants.

WA, by contrast, has only a handful of genuine PPPs, including the District Court building in the city, which was developed by the former Labor government.

More recently, the Barnett government has pursued several PPPs, most of which were advanced when Troy Buswell was treasurer.

One of these is the QEII Medical Centre car-parking project, which is proceeding in tandem with construction of the New Children’s Hospital on neighbouring land.

The contract was awarded to Capella Parking, which comprises deal sponsor Capella Capital, builder Probuild and car park operator Ezipark.

The equity investors are Catholic Super and Lend Lease, while ANZ Bank and Investec are the senior debt providers. The consortium was awarded a BOOT contract – which means it designs, builds, owns and operates the car park before transferring it to the state for nil consideration after 26 years.

In return, Capella gets to collect parking fees from about 5,140 car bays at the QEII site. 

Notably, that total comprises not just the 3,000 bays in the multi-storey car park Capella is building, but also about 2,000 bays elsewhere on the site, including car bays in the government-funded New Children’s Hospital.

Why is this model superior to alternatives, including traditional public sector procurement?

One advantage of the BOOT model is that it allows the state to transfer financial and operational risk to the private sector.

It means the state does not have to invest in, or take on extra debt, for the project – though from a balance sheet perspective, the state also misses out on having an income-producing asset.

The critical question is this: does the chosen procurement model deliver value for money?

Treasury’s answer to that question is contained in a project summary posted on the department’s web site.

The key to its methodology is the ‘public sector comparator’, which assumes the state uses “the most likely and efficient form of conventional delivery”. In this case, that was assumed to be a design and construct contract.

Treasury estimated the state would need 33 years and nine months to recover its risk-adjusted investment in the construction and operation of the project, with a parking fee of $3.50 per hour (in 2011 dollars).

In contrast, Capella Parking has a project term of just 26 years and its parking fee will be $3 per hour.

“Capella’s term is seven years shorter than PSC estimates and has significantly cheaper visitor tolls,” the report concludes.

The Treasury report does not seek to explain why the public sector needs more time and more money to recover its investment; it simply produces a calculation from its ‘black box’, which was prepared in accordance with national PPP guidelines.

The answer seems to lie in one critical assumption – that the private sector will complete the construction faster than the public sector and by a very large margin.

The report states that Capella is contractually obliged to complete the new car park by July 2014, which will be 36 months after executing its contract.

“This represents a nine-month improvement over the state’s reference project,” the report states.

That is an enormous difference – 36 months versus 45 months.

Once again, Treasury does not seek to explain why this is the case. But if it is correct, it begs the question of why the state would ever use non-PPP delivery.

The report also cites a number of qualitative factors that supported Capella’s proposal.

These include the quality of Capella’s design and the use of e-Tag technology to make car park operations more efficient. 

However, these are secondary to the core value-for-money question.

WA Business News has consistently advocated PPPs as a legitimate procurement option for government, where they deliver a superior outcome.

Capella may well deliver a superior outcome but the Treasury report does not demonstrate convincingly that will be the case.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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